Education economics or the economics of education is the study of economic issues relating to education, including the demand for education and the financing and provision of education. From early works on the relationship between schooling and labor market outcomes for individuals, the field of the economics of education has grown rapidly to cover virtually all areas with linkages to education.
An initial introduction into decisions within the educational sector itself by Eric Hanushek led to a dramatic expansion of economists into study of the operation and performance of educational institutions.[1] It has become a very vibrant area for research by young researchers, and it has led to four separate Handbook volumes covering both theoretical and empirical issues
The dominant model of the demand for education is based on human capital theory. The central idea is that undertaking education is investment in the acquisition of skills and knowledge which will increase earnings, or provide long-term benefits such as an appreciation of literature (sometimes referred to as cultural capital). An increase in human capital can follow technological progress as knowledgeable employees are in demand due to the need for their skills, whether it be in understanding the production process or in operating machines. Studies from 1958 attempted to calculate the returns from additional schooling (the percent increase in income acquired through an additional year of schooling). Later results attempted to allow for different returns across persons or by level of education.
Statistics have shown that countries with high enrollment/graduation rates have grown faster than countries without. The United States has been the world leader in educational advances, beginning with the high school movement (1910–1950). There also seems to be a correlation between gender differences in education with the level of growth; more development is observed in countries which have an equal distribution of the percentage of women versus men who graduated from high school. When looking at correlations in the data, education seems to generate economic growth; however, it could be that we have this causality relationship backwards. For example, if education is seen as a luxury good, it may be that richer households are seeking out educational attainment as a symbol of status, rather than the relationship of education leading to wealth.
Educational advance is not the only variable for economic growth, though, as it only explains about 14% of the average annual increase in labor productivity over the period 1915-2005. From lack of a more significant correlation between formal educational achievement and productivity growth, some economists see reason to believe that in today’s world many skills and capabilities come by way of learning outside of tradition education, or outside of schooling altogether.
An alternative model of the demand for education, commonly referred to as screening, is based on the economic theory of signalling. The central idea is that the successful completion of education is a signal of ability
An education production function is an application of the economic concept of a production function to the field of education. It relates various inputs affecting a student’s learning (schools, families, peers, neighborhoods, etc.) to measured outputs including subsequent labor market success, college attendance, graduation rates, and, most frequently, standardized test scores. The original study that eventually prompted interest in the idea of education production functions was by a sociologist, James S. Coleman. The Coleman Report, published in 1966, concluded that the marginal effect of various school inputs on student achievement was small compared to the impact of families and friends. Later work, by Eric A. Hanushek, Richard Murnane, and other economists introduced the structure of "production" to the consideration of student learning outcomes.
A large number of successive studies, increasingly involving economists, produced inconsistent results about the impact of school resources on student performance, leading to considerable controversy in policy discussions. The interpretation of the various studies has been very controversial, in part because the findings have directly influenced policy debates. Two separate lines of study have been particularly widely debated. The overall question of whether added funds to schools are likely to produce higher achievement (the “money doesn’t matter” debate) has entered into legislative debates and court consideration of school finance systems. Additionally, policy discussions about class size reduction heightened academic study of the relationship of class size and achievement
